Changes in Service Tax Rate on Works Contract w.e.f. 01.10.2013

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Service Tax on service portion in Works
Contract (effective from 1st October, 2014)
Service portion in the execution of a work
contract is subjected to provisions of partial Reverse Charge Mechanism in case
such service has been provided by any individual, HUF or partnership firm,
whether registered or not, including association of persons, located in the
taxable territory to a business entity registered as body corporate located in
taxable territory. As per existing rules in such cases 50% of service tax is
payable both by service provider and service recipient.


The valuation of service portion in Works
Contract is governed by Rule 2A of Service Tax (Determination of Value)
Rules, 2006 which provides two options for the same.
OPTION I: Value of service portion in execution of work contract
shall be equivalent to the gross amount charged for the works contract less the
value of property in goods transferred in execution of said works
contract. 
OPTION II: There were three categories. The categories and there
valuation of service portion is tabulated as under:-
Sl. No
Categories
Valuation principle
1
Original
works
40%
of the total amount charged for works contract
2
Works
contract entered for maintenance or repair or reconditioning or
restoration or servicing of any goods.
70%
of the total amount charged for works contract
3
Other
work contracts including maintenance, repair, completion and finishing
services such as glazing, plastering, floor and wall tiling, installation of
electrical
fittings of an immovable property
60%
of the total amount charged for works contract
The change that has been brought by
Union Budget, 2014-15 is amendment of Rule 2A of Service Tax
(Determination of Value) Rules, 2006 wherein they have merged the
categories 2 and 3 above into a single category with percentage of service
portion as 70%. 
This change will come into effect from 1st
October, 2014
 and
same has been notified vide Notification No. 11/2014-ST dated 11th July, 2014.
It has been explained in the TRU, MoF, GoI letter No D.O.F No. 334/15/2014-TRU
dated 10th July, 2014 that this rationalization by way of merger of categories
has been made to avoid disputes of classification between these two categories.
It is pertinent to mention here that the
service provider and recipient would continue to pay 50% each of total service
tax payable.
Due to above amendment, the service tax
liability in respect of third category (maintenance, repair, completion and
finishing services such as glazing, plastering, floor and wall tiling,
installation of electrical fittings of an immovable property) has been hiked as
from 1st October, 2014, service tax would be computed on 70% of the amount
charged instead of 60%, due to which the effective service tax rate on
the total amount charged would be hiked from 7.416% to 8.652%, out of which
4.326% (3.708% under existing provisions) of total amount charged would be paid
both by service recipient and service provider.
As the above amendment is applicable from 1st
October, 2014 in certain borderline cases, confusion may creep in like whether
old or new rate, i.e., 60% or 70% would be applicable where service has been
completed before 1st October, 2014 but invoice has been raised and payment made
after said date.
In order to solve the above and like issues,
we need to fall back on the Rule 4 of the Point Of Taxation Rules, 2011 which
mandates determination of point of taxation in case of change in effective tax
rate. As per Rule 2(ba) of said Rules “change in effective rate of tax”
include change in portion of value on which tax is payable in terms of
notification issued or Rules made there-under.
As in case of work contracts of maintenance,
repair, completion and finishing services such as glazing, plastering, floor
and wall tiling, installation of electrical fittings of an immovable property,
the percentage of value of service has been increased from 60% to 70%, it is a
change in effective rate of tax and thus Rule 4 of the Point of Taxation Rules,
2011 will come into play.
Rule 4 of Point of Taxation Rules, 2011 is
being reproduced as under:-
Determination of point of taxation in case of
change of rate of tax:- Notwithstanding anything contained in rule 3, the point
of taxation in cases where there is a change in effective rate of tax of tax in
respect of a service, shall be determined in the following manner, namely:
(a) in case a taxable service has been
provided before the change in effective rate of tax,-
·        
(i)
where the invoice for the same has been issued and the payment received after
the change in effective rate of tax, the point of taxation shall be date of
payment or issuing of invoice, whichever is earlier; or
·        
(ii)
where the invoice has also been issued prior to change in effective rate of tax
but the payment is received after the change in effective rate of tax, the
point of taxation shall be the date of issuing of invoice; or
·        
(iii)
where the payment is also received before the change in effective rate of tax,
but the invoice for the same has been issued after the change in effective rate
of tax, the point of taxation shall be the date of payment;
(b) in case a taxable service has been
provided after the change in effective rate of tax,-
·        
(i)
where the payment for the invoice is also made after the change in effective
rate of tax but the invoice has been issued prior to the change in effective
rate of tax, the point of taxation shall be the date of payment; or
·        
(ii)
where the invoice has been issued and the payment for the invoice received
before the change in effective rate of tax, the point of taxation shall be the
date of receipt of payment or date of issuance of invoice, whichever is
earlier; or
·        
(iii)
where the invoice has also been raised after the change in effective rate of
tax but the payment has been received before the change in effective rate of
tax, the point of taxation shall be date of issuing of invoice.
After determining Point of Taxation as per
above Rule, it is to be seen whether it falls before 1st October, 2014 or on or
after said date. If same is fixed prior to said date then the valuation would
be determined by existing rules and 60% would be regarded as taxable value and
where it falls on or after said date then 70% rate shall be applicable.
The application of Rule 4 is illustrated
below:-
Sl. No
Date of provision of service
Date of
Invoice
Date of payment
POT as per Rule 4
Valuation principle applicable, i.e.,
New (70%) or existing (60%).
1
30-09-2014
02-10-2014
05-10-2014
02-10-2014
New
2
30-09-2014
30-09-2014
05-10-2014
30-09-2014
Old
3
04-10-2014
30-09-2014
05-10-2014
05-10-2014
New
4
30-09-2014
02-10-2014
30-09-2014
30-09-2014
Old
5
02-10-2014
30-09-2014
30-09-2014
30-09-2014
Old
6
02-10-2014
02-10-2014
30-09-2014
02-10-2014
New

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